Economist Milton Friedman often said that inflation is the cruelest tax

1. Economist Milton Friedman often said that inflation is the cruelest tax. If we think of a tax as decreasing the value of your income or assets, which of the following does inflation tax (there could be more than one answer).

a. People who hold currency as an investment

b. People with investments in gold and silver

c. People invested in stocks

d. People who hold money in no interest checking accounts

2. A relatively small positive aggregate demand shock (a rightward shift of the AD curve) may increase growth but a large shift in the AD curve often does not. Why might this be so? (think of the inflationary effects of the two scenarios).

3. The Federal Reserve System has four traditional tools to influence and control the money supply and have developed three more since 2008. All of these have limits and constrain the Federal Reserve’s effectiveness. Explain two limits to the Fed’s actions and use one of the tools as an example.

4. The banking system receives a new deposit of $1,000 and the reserve requirement is 20%. At the end of the lending cycle how much new money will be in the economy?

a. If the reserve requirement changes to 10% how does your answer change?

b. If the reserve requirement changes to 30% how does your answer change?

5. One of the most important policy debates in monetary and fiscal policy is the debate between rules and discretion. Which approach do you think is best and why? (keep in mind the why is the most important part here).

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